The criteria to assess the compatibility of national, regional and local film and audiovisual support schemes with EU state aid rules are due to expire on 31 December 2012. These criteria were set out in the Commission's 2001 Cinema Communication (see IP/01/1326). Their validity has been extended three times, most recently in 2009 (see IP/09/138).

In June 2011, the Commission launched a first round of public consultation on the basis of an issues paper (see IP/11/757 and MEMO/11/428), as a first step towards completing a review of the state aid rules. The draft Communication published today is based on the proposals made in the issues paper and the contributions received in the first round of public consultation.

This second round of consultation invites comments on the new draft Communication. The deadline for comments is 14 June 2012. After reviewing the comments received, the Commission expects to adopt a revised Communication in the second half of 2012.

What did the Commission's Cinema Communication of 2001 do?

EU state aid rules maintain a Single Market, where companies from all EU countries can compete and trade evenly, by preventing Member States from selectively promoting companies to the detriment of competitors within the EU. In general, financial support provided by states or by state bodies that threatens to distort competition by favouring particular companies or industries are forbidden under EU law.

The Treaty on the functioning of the European Union (TFEU) allows a few exceptions to this principle, including for State aid granted with a view to promote culture. Such aid can be deemed compatible under certain circumstances, set out in Article 107(3)(d) of the TFEU and in the 2001 Cinema Communication.

What is meant by a territorial spending obligation in EU law?

A territorial spending obligation is any condition which restricts the choice of origin of goods, services or people by the beneficiary of the aid and may therefore affect trading conditions and competition in the Union to an extent that is contrary to the common interest, due to the infringement of free movement rights in the Internal Market. This is stated in paragraph 42 of the draft Communication: "aid schemes must not …unduly limit the freedom of aid beneficiaries to acquire goods and services anywhere in the internal market". However, aid conditions which are based on the place of use or consumption of the goods or services, irrespective of their origin, are not considered to be territorial spending obligations.

For example, if a Member State says that aid is only available for production activity in that Member State, this does not infringe the basic principles of the Treaty (and is not a territorial spending obligation) because producers are still free to buy the related goods and services from anywhere in the EEA (and not only from businesses in that Member State).

Illustrative examples:

1) A regional film support scheme requires that all films it supports include at least 10 days of the film production activity in the region. However, the producer is free to use goods, services and people from anywhere in the EEA in the production. This is not a territorial spending obligation because there is no restriction on the origin of goods and services involved in the production.

2) A national film support scheme requires that all films it supports spend 50% of the total film production budget on goods and services provided by companies based in that Member State. This is a territorial spending obligation because there is a territorial restriction on the origin of goods and services involved in the production.

Why is the Commission proposing to change the territorial spending criterion of the Communication?

The fundamental principles of the Internal Market, which guarantee the free movement of goods, workers, services and capital, require that aid schemes must not unduly limit the freedom of aid beneficiaries to acquire goods and services anywhere in the internal market.

The territorial spending criterion of the existing Communication allows Member States to impose that up to 80% of the entire production budget of a subsidised film or TV production is spent on goods and services provided by businesses based in the Member State offering the aid, notwithstanding the much more limited percentage of such budget being subsided.

For example, even if a Member State offers only a relatively small grant of €300,000 to a €3 million film production, this means that it can insist that €2.4 million of the production budget is spent on goods and services provided by businesses in that Member State as a condition of the aid. Only €0.6 million of the production budget could then be spent on goods and services provided by businesses from outside that Member State.

Various judgements by the Court since 2001, such as the Laboratoires Fournier ruling, indicate that the Court is likely to consider that such a restriction on the origin of goods and services is disproportionate. The issues paper therefore proposed to limit the maximum territorial spending obligation to 100% of the aid amount instead of the current 80% of the production budget. Responses to the public consultation varied widely, ranging from supporting the existing rule to recommending a total ban on territorial spending obligations in film support schemes.

What territorial spending obligations does the draft Communication allow?

To allow film-related expertise to build up in the EU, the draft Communication proposes a special exception: that a film support scheme could refuse to support films which will not spend at least 100% of the aid amount locally (eligibility criterion). This would be a territorial spending obligation which would not normally be allowed by EU law, in view of free movement restrictions it could result in. However, the draft Communication proposes that this could be a proportionate exception to the general principles in view of the highly mobile nature of film production.

This would not prevent a selection committee from awarding aid to a film that it considers to be the most deserving among the project proposals received. In practice, overall, film productions supported under a film scheme often spend more of their overall budget in the territory than the aid amount.

As there seems to have been some misunderstanding, it is worth noting that both the territorial criterion of the 2001 Communication and the proposed territorial criterion in the draft Communication give Member States a possibility (not an obligation) to impose territorial spending requirements on film productions.

Illustrative examples:

3) In illustrative example 2 above (national film support scheme requiring films to spend 50% of the total film production budget on goods and services provided by companies based in that Member State), imagine that the aid intensity is 50% of the production budget. In this case, the draft Communication allows the scheme to require that up to 100% of the aid amount (ie, up to 50% of the production budget) is spent on goods and services provided by local companies. Consequently, the scheme meets the territorial spending criterion of the draft Communication, even though it includes a territorial spending obligation, and the Commission would declare it compatible with the internal market.

4) As a condition of its aid, a local film support scheme requires that at least 200% of the aid amount has to be spent on goods and services provided by companies based in that locality. As in illustrative example 3, this is a territorial spending obligation because there is a restriction on the origin of goods and services involved in the production. However, contrary to example 3, the Commission would not approve the local film support scheme unless the Member State reduces the territorial spending obligation to fit within the '100% of the aid amount' territorial criterion of the draft Communication.

How can this rule apply to schemes such as film tax incentives?

The draft Communication sets out a specific rule foraudiovisual support schemes in which the aid amount is calculated on the basis of the production expenditure in a given territory, such as film tax incentives.

The requirement proposed in the draft Communication (that, in such schemes, any production expenditure within the EEA must be eligible for the aid) reflects the Court ruling in the Laboratoires Fournier case. In addition, as for all film and TV production support schemes, the draft Communication states that the Member State may still require that up to 100% of the aid amount is spent on goods and services originating in its territory.

Note that, according to the general principles of taxation, Member States are not obliged to grant any tax incentive to expenditure which is not directly linked to activities that generate income taxable in their territory.

Illustrative examples:

5) A film tax incentive in which the eligible expenditure has been defined as the pre-production, principal photography and post-production expenditure by the beneficiary on goods and services used or consumed in the Member State. This is in line with the general principles of taxation and of free movement since the origin of those goods and services is not restricted.

6) A film support scheme in which the aid amount is proportionate to the production expenditure on EEA goods and services may require that all the production activity takes place in its territory and that 100% of the aid amount is spent on goods and services originating in that territory.

What about the competition between Member States to attract major film productions?

Some responses to the first consultation argued that Europe would lose major productions if the Commission were to prohibit that Member States use state aid to attract them. As this illustrates, there is clearly international competition to attract major productions, including between several US States, Canada, EU Member States and several other countries around the world. A number of EU Member States have independently and confidentially indicated to the Commission services when notifying their film support schemes that they are enhancing or introducing their scheme to be able to remain competitive with certain other Member States.

The draft Communication proposes that production expenditure within the EEA, and not only in the granting Member State, should be eligible for aid under schemes where the aid amount is calculated on the basis of the production expenditure on goods and services originating in a particular territory. This would allow films shooting in different Member States to benefit from different state aid mechanisms. Thereby European production places would remain attractive for producers while the threat of a distortion of competition in the Internal Market would be considerably reduced.

In addition, the draft Communication proposes the following regressive schedule if the aided film is not a European work:

Part of the production budget

Maximum aid intensity

Less than €10m

50.00%

€10m - €20m

30.00%

Over €20m

10.00%

For example, in the case of a film with a production budget of €100m which does not qualify as a European work according to the definition proposed in the annex to the draft Communication, the maximum cumulative aid amount would be the total of €5m (50%) for the first €10m of the budget, €3m (30%) for the next €10m of the budget and €8m (10%) for the remaining €80m of the budget – ie, €16m.

Is the third bullet point in paragraph 42 in line with the Directive on the posting of workers?

This bullet point ("… aid schemes must not, for example, … require workers of foreign companies providing filmmaking services to comply with national labour standards") repeats the wording from the 2001 Communication. However, it should refer to the Directive on posting of workers, whose interpretation is available from the website of the European Commission's DG Employment.

Regarding paragraph 44(2) of the draft Communication, what would it happen with films originated in countries with more than one official language?

The draft Communication should have referred to anofficial language of Member States or regions, not to the national language of Member States.

How should the aid intensity for script-writing and development in paragraph 44(3) be applied?

The proposal is that scriptwriting and development could receive up to 100% public funding. For those projects which are turned into film productions, the cost of acquiring the script or developed project should be included in the production budget and the proportion of public funding should be included in the aid intensity calculation.

For example, a scriptwriter receives €10,000 from public funds (80% of the cost) to write a script and a producer subsequently acquires the script for €5,000. The cost of the script will be included in the production budget as €5,000. When calculating the aid intensity of the film, since the script received 80% public funding, the film should be deemed to have received €4,000 (ie, 80% of the €5,000 acquisition price) as aid.

How is the proposed aid intensity for film distribution and promotion in paragraph 44(4) supposed to work?

If a film with a production budget of €20m receives €10m aid overall (from all State sources), the aid intensity is 50%. The proposal in paragraph 44(4) is that a distributor would then be able to come forward with, say, a €20,000 distribution budget for the film and expect to obtain 50% of that as aid.

If the film was made in a third country and didn’t get any EU production support, according to para 44(4), it would have received (perhaps) 50% production support and hence should expect to receive €10,000 distribution aid (50% of the €20,000).

Does paragraph 44(5) of the draft Communication refer to distribution aid or production aid?

Paragraph 44(5) refers to production aid in the case of non-European works. It should appear after paragraph 44(2), and not after paragraph 44(4) as in the published draft.

Does paragraph 44(6) of the draft Communication propose to rule out aid for post-production and principal photography?

No. The sentence in the draft Communication attempts to clarify the corresponding sentence in the 2001 Communication.

The objective is that aid must not be reserved for individual parts of the production value chain. Script-writing and development are excluded from this.

For example, a Member State should not offer producers extra incentives explicitly for post-production work in the Member State. This would be an indirect aid to the post-production sector in the Member State. The aid should be for production activities as a whole.

What about films made under coproduction treaties between Member States and third countries which do not the definition of a 'European work' in the annex?

The definition included in the draft Communication is based on the definition of a European film in the MEDIA 2007 programme. In the context of State aid, it may be appropriate to add films made under coproduction treaties between Member States and third countries to this definition.

This definition has only been included as a proposed way to curb the competition between Member States to attract major international productions mentioned above. An alternative definition of a European work which could be appropriate is the one in the Audiovisual Media Services Directive. Other suggestions for a mechanism to curb the competition between Member States, possibly without requiring a distinction between European and non-European works, would be welcome.

What about state aid for transmedia/cross-media and games?

Since transmedia or cross-media projects are inevitably linked to the production of a film, the film production component is considered to be an audiovisual work within the scope of the draft Communication.

The majority of responses to the public consultation on the issues paper were against extending the scope of this Communication to games. Games have different characteristics regarding production, distribution, marketing, and consumption than films.

The Commission does not have a critical mass of state aid decisions relating to games and therefore has insufficient experience to define common assessment and exemption criteria for this type of aid. It would therefore be premature to integrate this sector in this Communication.

However, any state aid measures in support of games will continue to be addressed on a case-by-case basis.

Why is the Commission calling into question traditional release windows?

The issue of aid schemes imposing specific 'release windows' as a condition of the aid was raised by a number of contributions in the first public consultation. Producers and distributors argued that the marketing and release strategies for films should be left to the market as they vary from one audiovisual work to another. A study on multi-territorial licensing carried out for the Commission contains a list of Member States that impose such conditions.

Mandatory release windows as a condition of aid may have an impact on the visibility and circulation of audiovisual works, and hence on the effectiveness of the aid in ensuring that European audiences are offered a more culturally diverse choice of audiovisual works. The draft Communication therefore recommends Member States not to impose unnecessary limitations on the distribution and marketing of an audiovisual work as a condition for supporting it.